Credit Card Guide
 
Follow Us  twitter facebook You Tube Google+
 
Credit Cards > Credit Card News > Ask Erica > Sometimes, bankruptcy can actually be good



 
 

Sometimes, bankruptcy can actually be good

 
By
February 5, 2014
Ask Erica
tools
tools
email print comment
tools
SHARE

QDear Erica,

Credit counseling was a bust. I could not include all of my debts, and the ones that I did include were of no benefit. My counselor was very nice, but she basically said I had to declare bankruptcy if I wanted to save myself. I do not want to do that. Is this really my only option in this crazy world? Please let me know if there is something else I can do – David

AHi David,

I'm sorry that your experience with the credit counselor wasn't what you expected. However, the problem may not have stemmed from the organization or the employee, but with your particular financial situation.

Credit counseling agencies offer debt repayment programs, which can be a fine way to deal with a specific type of creditor. For the most part, we're talking credit cards. If you've struggled with on-time payments, or your balances have been maxed out, your lenders may have increased the interest rates. Penalty interest rates can soar above 30 percent. Once they've been hiked to such a degree, paying the debt down can be a slow and agonizing process. So much of the payment goes toward the interest and fees (which may include late fees) that getting out of debt can seem impossible. Ask Erica

For this reason, nonprofit credit counseling agencies were developed to bridge creditor and debtor. They help delinquent, stressed-out borrowers get back on track.

If your accounts are mainly credit cards and you have enough money coming in to meet essential expenses, debt payments, and had at least a little left over for savings (the counselor would have determined this by creating a budget), you could have gotten a break from those high interest rates.

Many creditors have agreed to reduce or even eliminate interest and fees for clients in a credit counseling program. Payments typically are withdrawn from the client's checking account automatically, which the agency distributes to each creditor on time. Upon completion — arranged for fewer than five years — you'd be debt free and have an established, positive payment pattern on your credit report.

But that didn't happen for you. Maybe you had some accounts that were sold to collection agencies. Collection accounts are rarely included in credit counseling repayment plans, because those companies tend to reject partial payments. Or perhaps you owe legal fines, back-child support, tax debt or are behind on your car or home payment. None of these may be included in a payment plan.

Another possibility is that you simply don't have enough income to support debt repayment. It would not be in your best interest to promise creditors money when you can't make rent or feed your family.

Sometimes bankruptcy really is the best option, David. It's a hard pill to swallow, but when your finances are very sick, it can act as a viable cure. If your counselor was suggesting Chapter 7, it would enable you to walk away from certain debts and start fresh. Chapter 13 might have been mentioned if you wanted to save property (some of which is subject to a legal claim in a Chapter 7) while paying off some debts in full and discharging others.

As for options, an alternative to bankruptcy can include doing nothing at all. This is only appropriate if you have no money or assets now or in the foreseeable future that can be claimed by a creditor who has sued you. If they won the case, and garnishments, liens and levies are permissible in your state (and the judge allows them), inaction isn't a good idea. You might also get aggressive about securing a job that pays enough to satisfy your debts.

Finally, if you were truly unsatisfied with the person you met with, schedule a meeting with someone else. It's possible she was a dud. And, as you know, counseling is free, so you'll be out nothing by giving it another try.

Got a question for Erica? Send her an email.


Share 
 
     

 
 

VIEW RELATED STORIES

After building great credit, here are the next steps - After building your credit to an excellent score, you might just wonder what your next steps should be ...

Share your card with an authorized user, not a co-signer - Sharing your card can wreak havoc on your credit no matter what you choose to do, but having a co-signer is more problematic than having an authorized user ...

Paying back a student loan isn't optional - In most cases, you can't discharge a student loan with bankruptcy, so it isn't going away. Even when broke, paying for your student loans should be a priority ...

ALL CREDIT CARD NEWS & ADVICE ARCHIVES >>

 
     

 
  If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the ‘Post to Facebook’ box selected, your comment will be published to your Facebook profile in addition to the space below.

Our editorial content is not sponsored by any bank or credit card issuer. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.
 
     


 
Secure SSL Technology
Secure SSL
Technology
 
Twitter Facebook You Tube Google+
About Us Privacy Policy Editorial Team Terms of Use
Contact Us California Privacy Rights Media Relations Site Map

Close X